independence – autonomy – self-determination

The Folly of Austerity

In his Budget speech the Chancellor described Britain as “the comeback country”; a quite remarkable assertion of triumphalism following a much longer, far slower economic recovery in Britain not only than in any of its recent history, but even than the Great Depression in the 1930s. This is an unprecedented record of failure to produce recovery in good order. Only in the Conservative Party would this result count as success.

Incidentally, George Osborne has proved to be as wretched a historian as he is an economist. The Scots did not participate at Agincourt; and had they been there, they would not have been “renegades”; but they would have been representing ‘king [James I] and country’ (as they did in thousands after Agincourt), defending France from unwarranted invasion by a tin-pot vassal, bringing tyranny and oppression. Ironically, at this time any ‘renegade’ Scots would have been with Henry V. Like so much in this Budget, the over-inflated, vacuous, politicised, vulgar Osborne rhetoric is contradicted by the facts.

So let us examine the Chancellor’s record of foresight, of judgement about what the real issues are, and the nature of his desultory claims to economic wisdom. Three special reminders of the Osborne ‘judgement’ will be provided in this article below. It is not reassuring.

Reminder One: In a speech at the Corporation of London on 21st June, 2005, George Osborne said this:

Here in the City of London we have a shining example of Conservative-led change. It is globally competitive, a powerhouse of innovation and ideas. The City’s Big Bang in the 1980s made a bonfire of regulation and restrictive practices, brought in international competition, and allowed the markets to benefit from the whole mixture through new trading technologies. That’s why London retains its leadership as the home of the most diverse and most successful capital markets in the world.

A shining example of Conservative-led change; it is good to know whom we should thank for the Credit Crunch: the ideology of Conservatism. Osborne’s “bonfire of regulation” lit the fuse to the greater bonfire of our whole financial system in 2007, and when the febrile regulatory witch-hunting activity was combined with the products from this powerhouse of “innovation and ideas”; it produced the vile cesspit of toxic financial instruments and lethal methods that has led us over the edge into the utter ruin of our national finances, the destruction of our economic stability, and the end of many ordinary people’s hopes and aspirations.

In the United States, Johnson and Kwak have exposed the fallacy of this bankrupt ideology that bailed-out the banks, which exacted no real penalties, but rather rewarded the perpetrators for their recklessness and unparalleled greed; and ended the farcical process of bank rehabilitation with even more gargantuan banks and the prospect of more dangerous banking than we had discovered in the Credit Crunch. We are actually going backwards.

Johnson and Kwak provide us with a reminder of one of the fatal misjudgements:

The conventional wisdom, shaped during three decades of deregulation, innovation, and risk-taking that brought us to the recent financial crisis, is that large, sophisticated banks are a critical pillar of economic prosperity.” (’13 Bankers: The Wall Street Takeover and the Next Financial Meltdown’. 2010: Ch.7, p.221)

For Johnson and Kwak, the conventional wisdom was entrenched in Washington, but they stiffen our resolve that this ideology must be challenged and resisted. They continue;

The megabanks used political power to obtain their license to gamble with other people’s money; taking that license away requires confronting that power head-on. It requires a decision that the economic and political power of the new financial oligarchy is dangerous both to economic prosperity and to the democracy that is supposed to ensure that government policies serve the greater good of society” (’13 Bankers’. 2010: Ch.7, p.221).

The same exploded ideology nevertheless remains largely uncontested in the intellectually unchallenging wastelands of Westminster’s mind-rotting culture; where George Osborne is nothing more than the small creature of the new financial oligarchy and the City. Regulation remains weak, but there are limits to the power of any regulation to resist the more dangerous speculative activities of the banks. As even Mervyn King eventually noticed: “The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion.” (Lecture to Scottish businesses, Edinburgh: October 20th, 2009).

George Osborne nevertheless might have tried to introduce and enforce tough banking regulation, because even given its limitations, regulation remains a valuable tool in the risk-uncertainty management toolbox: but he didn’t.

Meanwhile, beyond the limits of regulation, nothing whatsoever has been done to dismantle the excessive scale or the risks (to everyone else) carried by the megabanks. Such shrewd commentators as John Kay have recommended reducing the activities of banks to narrowly focused, boring, but non-speculative quasi-utilities (sadly, so bereft is our current system of basic utility regulation that this concept probably no longer provides a usable standard; we have lost the culture, the will and the judgement even to regulate utilities); or Laurence Kotlikoff has proposed placing bank ‘risky assets’ exclusively in mutual funds; but again this great beacon of our financial sector, the noble mutual fund tradition in banking, investment, mortgage-business, insurance or pensions no longer exists on a significant scale in Britain. It was blown away with everything else that savoured of ‘standards’, of public service, of genuine diversity, or of ‘the greater good’ in the 1980s. In Britain we have utterly destroyed our better selves: all in the name of ‘free markets’ that we now may reasonably doubt are free; and the authorities have recently been required to investigate (e.g., LIBOR, ForEx), lest we find they have been rigged to our common detriment all along.

The financial sector as operated in the City now openly disdains diversity for scale, equity for leverage, competition for political power; and operates a louche culture that is somewhere between a casino and an offshore tax haven. The City takes the profits; but the taxpayer carries all the risks. This is ‘free enterprise’ today; risk-free but entirely at the public expense, which patiently takes both the ‘hit’, and all the political flak from the tax-free profiteers. This is Osborne’s real legacy.

Nevertheless, in George Osborne’s venal, decayed, hubris-fuelled world “London is the global capital of the world” (Budget speech, 2015). I have no idea what this crackpot statement means; but it is probably completely meaningless.

We can say, however, that far from London being the source of most of the the economic calamities that have struck Britain within or without Government, and having drained every drop of our resources (much of it completely wasted); the City having utterly failed us – a fact that cannot be challenged; within five years of entering office, and with no good reason at all, George Osborne makes the overblown, absurd and frivolous claim, “we will build on London’s success”. Success? Crash? Credit Crunch? Nothing to do with London! Osborne wants you to think this “success” for London will only be achieved by helping the “North”! But while the logic of this claim is deeply elusive, we can follow the money; and here is where almost all the resources will really go:

Today we confirm: new investment in transport [in London]; regeneration from Brent Cross to Croydon; new powers for the Mayor over skills and planning; and new funding for the London Land Commission to help address the acute housing shortage in the capital.” (Budget Speech, 2015)

This is what Osborne means by not building the North up by ‘pulling London down’. London always comes first, last and everything in between; and always will. Let us all build up the London property bubble yet further; it is the Conservative solution to all economic problems since WWII. Boom-and-Bust is the Conservative way.

The British National Debt has doubled since Osborne entered 11, Downing Street. In 2008-9, the year before he became Chancellor, the National Debt (ONS statistics) was £724Bn (49% of GDP). In 2014-15, under his stewardship it is estimated to be £1,479Bn (almost £1.5 Trillion; 80% of GDP); but the National Debt is not forecast to peak until 2019-20, at a little over £1.6Tn; or using current Government forecasting reliability, it is quite probably increasing endlessly: who can tell?

The hero of austerity, George Osborne has cost Britain well over £700Bn in five years; now that is a peace-time record – but what on earth has this to do with austerity? Nothing: but this, he would like us to believe, is a triumph for a Government which believes above all in reducing both deficit and debt. It would have taken Osborne much, much longer to double the debt if he had just sat down, and spent the whole five years simply burning banknotes; and we would have been spared his famously infamous bungled 2012 Budget (“probably the most bungled budget in history”: Polly Toynbee, Guardian; April 16th, 2012), or his flip-flop reversals of policy on North Sea Oil; which he now celebrates as a triumph of his legendary absent-foresight. Oh, and rest assured I have not finished exploring his legendary absent-foresight.

More importantly, having failed badly against any measure of debt/deficit success (as defined by the Conservatives themselves) we might expect that the Chancellor would be prophecying doom and disaster at the scale of Britain’s current debt failure; but no, in Osborne’s world this turns out to be, well, a Conservative triumph.

This should lead us perhaps to doubt either the Conservative’s basic understanding of economics, or the plausibility of Conservative harbingers of debt-deficit doom; but no, that won’t work either; because we are in a special Conservative fantasy world, where anything can mean anything at all – just make it up; provided only Conservative economic ideology prevails. None of this is attached, at any point, anywhere, to the real world; which should come as a relief, but no surprise to the rest of us.

In fact while the debt and deficit are important, they are quite obviously a great deal less worrying than Conservatives claim; after all the Government is now painting a forecast £1.6Tn National Debt as a triumph, that they would have proclaimed as the Apocalypse itself, had it been presented to us in a Budget by a Labour government after five years in office. And the roof hasn’t fallen in. The walls stand.

The Conservatives having failed to tackle the Debt, according to their own standards of necessity in 2010 as the self-appointed champions of austerity; now present what was for them unacceptable levels of National Debt, as a great triumph for Conservative austerity. This simply will not do. Clearly, something is wrong with their analysis, because patently, anything goes; anything can mean anything; black is white, right is wrong; failure is success.

We are deep in the world of ‘Newspeak’. Under all this crude bluff and meaningless rhetoric a starker truth is struggling to come out; the Conservatives oversold both the scale of the austerity problem, and the best way out of the debt problem for Britain. The problem the Conservatives claimed was unmanageable, and that they have clealry failed to manage through the application of austerity, turns out to be manageable anyway. Nothing changes. This is the reality of Osborne’s argument: and the moral is?

Austerity never was the solution to the debt problem.

Britain has been near-bust (or actually bust) for most of the last century. The difference between then and now is that two World Wars destroyed our (already over-extended) finances after 2014. In the 21st century however, unaided and for reasons only known to piratical Conservative and New Labour ideologues, we finally managed to destroy our financial system and ruin the national finances all on our own; a joint-venture of utter folly by Conservative (1979-1997) and New Labour (1997-2007) Governments. These are the facts.

In Osborne’s fantasy-land it is a triumph that after five years of his ‘management’ the deficit is a little lower; but not much lower, only a little lower; in fact the movement is marginal. The Deficit is not now forecast to be eliminated until 2018-19: believe that forecast if you like; on past performance his forecast is worthless.

In 2010 Osborne had forecast the Deficit’s complete elimination within one Parliament. He couldn’t do it, and the proof of his flawed case is that he gave up trying. But the deficit ‘reduced’ is simply an extremely convoluted way of Osborne indirectly telling the British people that the National Debt is still going up; and up, and up, and relentlessly up.

Osborne now forecasts the National Debt will stop going up at the far end of the next Parliament; but of course he hasn’t hit a single forecast on deficit or debt since his government came to power – so we can simply dismiss this low-probability, risible proposition out-of-hand. He only rescued the deficit from spiralling upwards by putting ‘austerity’ on hold (save for some gratuitously selective and targeted spite). Yet elimination of the deficit and stopping the increase in the National Debt mounting ever higher is precisely what Osborne and the Conservatives tell us they are “for”; it is what they are good at: in which case – oh, dear; assume the brace position.

What Osborne says and what the Government does are not (of course) actually the same thing; after all, this is Conservatism. The austerity policy remains, but large chunks of the ‘cuts’ we suddenly found (from around 2013), are being pushed ever further into an undiscussed future. The Government slashed and burned for three years; found that austerity didn’t actually work, continued to talk austerity, cutting judiciously only where there were easy, soft targets offering maximum political-rhetorical return from the righteous Conservative ideologues, and where the victims were politically too weak to fight back; while slackening the austerity pressure wherever they thought nobody would (wish to) notice, in order to rescue the wreckage of their economic mismanagement.

Now we are supposed to return them to office in May, in order that they may return to the next three years of slash-and-burn, safe from an election for five years. Of course, the policy will not work, but this is ideology, and it will serve the City small-state-nil-tax-paying ideologues for three good years of comfortingly brutal austerity applied to someone, anyone else; then the Conservatives will run up to the 2020 general election, by attempting to cover their disastrous tracks through a mixture of PR disinformation and tax giveaways; unless of course, the next Crash has not already struck us, and them, down.

What is the evidence for a stealthy Osborne desertion of austerity? Oscar Jorda (San Francisco Fed) and Alan Taylor (University of California) have used a new statistical method applied to local empirical data (distinct from VAR/SVAR) to examine economies where there is evidence of shocks to fiscal policy; their analysis, published in September, 2013 using Local Projections/Inverse-Probability-Weighted Regression Adjustment (LP-IPWRA), was a focused assessment of Britain’s austerity fiscal policy. The analysis decisively showed that since 2010, austerity in Britain had damaged growth.

In the predicament where interest rates set by the Bank of England are already rock-bottom and cannot be used to offset fiscal tightening, fiscal policy itself becomes even more critical; the Jorda-Taylor analysis showed that austerity in a downturn is contractionary, and it hurts growth; badly.

In short, the policy directive to be drawn from the Jorda-Taylor research was conclusive; only operate austerity in a boom, not a slump (this is Keynesianism, but it falls naturally out of the analysis; rather than a-priori Osbornianism – the pre-loaded ideological assumption that ignores any inconvenient reality).

We need not rely exclusively on the novel analysis of Jorda and Taylor. It seems to have dawned on the Government itself around 2012/13 that their austerity policy was a dud; they just didn’t tell anyone. They furtively changed tack. Jonathan Portes quotes Robert Chote (OBR) in 2013, writing that in spite of Osborne’s less than rigorous protestations, “deficit reduction appears to have stalled”. Portes in turn argued that most of the Government’s net public investment cuts actually stopped as early as 2012:

because the government belatedly realised that cutting investment was a major mistake and that the economic imperative was actually to do precisely the opposite (not that there was much investment left to cut); and it stopped putting up taxes overall. So we can see also what’s happened since – with the impact of the weak economy on tax receipts reducing revenues, the deficit has been flat and is projected to stay flat.” (New Statesman, 10th September, 2013)

The weight of economic opinion that has noticed the lacunae between Government rhetoric and reality on austerity (at best an obvious subterfuge) is overwhelming. Mark Blyth, another acute US-based academic economist, has noted that net Government consumption in the UK fell 0.1% in 2011; but actually increased +2.6% in 2012.

“This boost to consumption, right where it matters in terms of consumptive bang-for-the-pound effectively put austerity ‘on-hold’ in the UK”.

Nevertheless,

The rhetoric of austerity continued …. and the reality of budget cuts on social services, one-third of which targets disabled workers, continued” (‘Austerity: the history of a dangerous idea’: 2015; Postscript 2014, p.253).

Why insist on a culture of austerity when the Conservatives know that it does not work in government? There are three basic reasons. First, it is not a good idea to admit that everything you believe in is actually, and brutally obviously, wrong. Second, Conservatives are eager to claim the appearance of a kind of virtuous, puritan rectitude, however implausible or unconvincing that may be as an image of Cameron, Osborne or Boris Johnson; but at least to appear as more austere, more self-denying in the righteous cause of ‘austerity’ than their political opponents; hence the ridiculous mileage that was immediately wrung out of how many kitchens a political leader may possess.

Third, and most important, ‘austerity’ is a Conservative moral imperative, a loftily detached guide for the masses; the rhetoric is thus an orchestrated, quasi-pavlovian exercise in guiding public opinion and behaviour to reinforce a kind of blanket, soporific, mass docility that chimes with a world of zero-hour contracts, benefit cuts and a small-state.

Fear of poverty is the best (only?) inducement Conservatism can ever think of, to ensure the provision of a reliable cheap-labour market, feeding in to a low-interest rate, savings-averse, consumer-driven, tax-avoidance dependent, London-focused, cynically exploitative, rip-off, ‘market’ (so-called) economy with nugatory regulation; welcome to the perfect political framework for an oligarchy.

Blyth gathers the threads of all the Osborne contradictions together, to summarise Conservative economic sleight-of-hand, thrown together with a ragbag of the old consumption-boosting favourites; the antiquated, long discredited, short-termist, boom-bust mechanisms of Conservatism for producing the appearance of economic dynamism in half the country that always ends the same old way, and that we all know so well:

[A] fall in savings, plus the UK’s government decision to put the financial sector back together again with bigger airbags, combined with the ease-off on austerity to pump up a new housing bubble, centred once again in London. In other words, its the same old growth model put back together again…. …. ”. (‘Austerity’: p.253-4)

Of course none of this will surprise anyone, because George Osborne has no foresight; and it seems no memory either.

Reminder Two: on 12th July, 2005 in a speech to the Centre for Policy Studies, Osborne attacked the then Chancellor, criticising Gordon Brown for, of all things, “excessive regulation”: of

“spending too much, wasting too much, taxing too much, regulating too much and interfering and meddling too much. These are exactly the opposite of what Britain needs to do to compete in the modern world.”

What we needed in 2005, according to the wisdom of Osborne, is thus ’the opposite of regulation’. What we needed, it seems, was no interference in the finance sector; and we may therefore deduce, what Britain really needed was just a whole lot more irresponsibility, recklessness and unvarnished greed. For Osborne our economic stability was not at risk, the unregulated banks were not out of control and on the verge of destroying the whole financial system, or of sending the economy into an unstoppable spiral of deep recession from which it has never fully recovered; the problem was rather, “interference”. Well, we can rest easy; George Osborne will not interfere, except to slash-and-burn public spending.

George Osborne is an ideologue, and in his febrile imagination the financial sector is not a risk, but rather “stability is at risk because of the Chancellor’s [Gordon Brown] excessive spending”. The conventional wisdom of a one-eyed Conservative Party that is blind to its own folly, is therefore that Britain’s problems are all simply the consequence of Government over-spending: a simple problem that allows simple-minded Conservatives to offer a simple solution: austerity.

And so it came to pass: stumbling into office the Conservatives decided the real problem was not a catastrophic failure of the private sector and the irresponsible, feckless excesses of an only too free-enterprise banking industry, and a business culture increasingly marked in Britain by industrial-scale misselling, rip-offs, the rise of usury (cynically aimed at the poor), and the abdication of regulation, to say nothing of the abdication of common sense, or even basic decency; but all the ills were down to government spending: and what was needed to cure that monster was austerity.

Reminder Three: just before the Crash, George Osborne, with typically impeccable, misfiring timing, heaped praise on Ireland as a “shining example” – for Britain!:

“Ireland stands as a shining example of the art of the possible in economic policy-making … Ireland has shown the world that wise economic policy-making can produce outstanding results that surpass all expectations, so that we can meet our potential, achieve our goals, and share rising prosperity in an increasingly competitive world.” (speech in University College, Dublin; February, 2006).

He was still promoting the same example of Ireland for reforming its economy, makingitself competitive, and strengthening its public finances – in 2008 (speech in LSE; January 11th, 2008).

The distinguished financial commentator Martin Wolfe eloquently expressed what is really in store for us in Britain. Presciently he wrote,

What is emerging is a slightly better capitalised financial sector, but one even more concentrated and benefitting from explicit state guarantees. This is not progress: it has to mean still more and bigger crises in the years ahead.” (Financial Times, 29th September, 2009)

Wolfe’s foresight then remains intact today; after all, George Osborne was Chancellor in the intervening period. Johnson and Kwak in the United States meanwhile argued that:

there is no reason to believe that bankers will refrain from inventing new toxic products and precipitating a new crisis in the future. What’s more, given the growth in the size of the leading banks, the next crisis is likely to be even bigger.” (’13 Bankers’. 2010: Ch.7, p.193)

The detachment from reality that Osborne’s politics represents stems from the systemic inability of Conservative (and a few Labour) ideologues to face squarely the fallacies of their failed ideology; and the gross blunder that is the policy of austerity. The problem Britain faced in the Credit Crunch was a private-sector banking meltdown which could only be stabilised by drastic state intervention. This is undeniable; but the Conservatives deny it anyway.

The fact that our regulatory regime was also inadequate simply reminds us of the very low general level of competence we are obliged to rely on in Westminster; but it does not turn a catastrophic failure of free-enterprise market economics into a problem of public sector spending. And yet, even now the Labour Party will not desert the rhetoric, or the ideology of austerity that they have borrowed from the Conservatives; their ideological partners.

27 replies

Great article. You have succeeded in scaring the hell out me and have now made it crystal clear why we could not have possibly won the Referendum. These thieves need every last bit of Scotland’s resources to play with.

Yep private debt at 2007 levels now, inflation sinking and interest rates rock bottom, stagnating salaries – just waiting for the pop.
Labour’s turnaround on austerity is simply incredible although they are probably trying to appeal to a pro-austerity media. They really have shot themselves in the foot.

Excellent John,don’t suppose too many Tories (red or blue) will be reading it however.
Thatcher,stripped the UK economy of most means of manufacturing production,as it now turns out,mainly for ideological political reasons i.e. to break the unions.
The Tories moved their money out of the UK at that time into German industries and elsewhere leaving good old Blighty with its former colonial network of offshore tax havens to continue to be exploited with the City of London at it’s centre.
That is her legacy to the UK,an economy hugely dependent on financial services with no means of paying off it’s debt mountain short of wiping out public spending completely.
There Is No Alternative unfortunately for whoever is in charge at Casino Central and it is all about not scaring the horses with any talk about debt and leaving it to future generations to deal with it.
The Tories (red and blue) however,have been very successful according to their principles in taking money from the poor and giving it to the rich….very successful.
Could an independent Scotland have done any worse?
Not in a million years!

Excellent piece John, I’d only disagree with your characterisation of government debt, but I’ve done that before so I won’t repeat the details.

The change in policy leaps out of the quarterly figures, with a sudden step-change after the first quarter of 2012. Prior to that there was sustained cutting of the government’s fiscal deficit – which plunged the UK back into recession – but ever since then it’s pretty much flatlined. As you say, they show every sign of at least partly understanding reality but their ideology prevents them admitting it.

We also now have the ‘good’ news of zero inflation, and mad happy-smiley stories about how a little bit of deflation will be good for us. We’ll all be able to spend more because our rising wages will go further with falling prices. Yay!

What’s that?

Oh, yes, there’s the unstated assumption that firms will raise wages even though they’re forced to drop prices. Ignore that. It’ll be happy-fun times for everyone! Firms won’t cut wages to match their depressed prices; people won’t find their mortgage and other debt – nominally fixed remember, no drops here – harder to service; defaults won’t increase. It’ll just be for a little while; a short boost before anything bad can happen. Cheap TVs – and coffee machines – woohoo!

Big cuts to government spending, ie. further demand destruction, in this environment are a recipe for a debt-deflationary disaster, especially with the Eurozone already into that downward spiral, and the US also hovering on the edge. And there isn’t a single party at this election that has a thorough understanding of the situation, not judging by their policies anyway.

Thank you. On debt I was reflecting on the Conservative perspective and lack of candour. While I still have some reservations on the debt issue (and I will not repeat our prior debate) I have in fact moved further toward the position that you articulated in the interim.

Very happy to hear it. I agree with your main points; the divergence between rhetoric and action – and between rhetoric and wider reality – has been stark, and the stated determination – of both Conservatives and Labour – to impose further spending cuts is boneheaded ideology.

I forecast another 20 years of austerity, the selling off cheaply (to foreign investors) of more of the state assets that we have paid for over the years, the cost of essential services rising and their quality falling. Does the UK citizen really want to see his taxes siphoned off abroad never to be recycled in this country again? The man has got it completely wrong. And worst of all, the City will be protected again.

With one bound into independence and competent economic management, we could be free of all of this.

Aside from Paul Mason on Channel 4 News, this is in contrast to the vast majority of the media coverage not just of the budget but economics in general; it seems to me they are wilfully awful at explaining and informing the public on all matters economic. Most economic items only focus on froth, back and forth claims between Tory & Labour spokespeople – that’s when it’s not being presented as straightforward political propaganda. The main alternative appears to be a dry, dull and overly complex old-fashioned BBC style designed to ward off the layman.

I have a basic but sufficient grasp of economics to understand most of these complexities when explained clearly by someone who really has a depth of knowledge, so thanks to John and Bella for publishing a number of excellent pieces like this to help us – even if it does tend to induce a feeling of god help us!

Thank you. I can do no better than quote Mark Blyth. The quotation below is taken from a statement he made to the US Senate on the Budget. It is of course about the US, but the principles to which he refers – GDP, demographics etc., apply to everyone. I offer it only as a starting point, not a full explanation. You can find Blyth’s full statement on the Web (budget.senate.gov).

In the UK I would merely add that we require to support the funding requirements of SMEs over the rapacious, predatory demands of the City, and clear out the tax havens. Osborne proposes to raise £3Bn from people who have avoided tax successfully up till now. he could have done this 5 years ago (£15Bn lost). And he should go further – then we could cut the nominal rate of tax (and the average rate paid) for everyone else – the mugs on PAYE. He should also have gone further and squeezed more. He also needs to rebalance the economy for real; and stop subsidising London and the City at everyone else’s expense. Of course it will not happen.

Blyth Quote:

“as for the sustainability of all this debt, only three things matter. The first is the rate of growth in the stock of debt, the second is the rate of growth in GDP, and the third is rate of growth in population. On all three measures the US fares better than almost anyone else in the developed world.
Our demographics are positive and this is important because what matters for government debt in a fiat money system is the intergenerational capacity to tax. Promises made now will be redeemed by a claim on a bigger population and a bigger economy. If you economy is growing (and the US is leading the pack) and your population if growing (we do OK there), then your stock of debt as a share of your GDP declines while your ability to service that debt increases. If you are Japan or Italy, with low growth, high debt, bad demographics and an
3
inability to get immigration right, then you do have a long run fiscal problem. But the US, which issues the global reserve asset (the dollar) that every other country wants to hold and indeed has to earn in order to conduct foreign trade, has all three things heading in the right way.
In short, the day the US is insolvent is the day that every other sovereign alternative on earth has already gone up in flames. The notion that we have a fiscal crisis that can only be alleviated by balancing the budget is not just wrong. It’s harmful.
Turning now to savings and spending, it’s interesting to compare the way different countries speak about debt and savings and the like. For the Germans, debt is ‘Schuld’ – which means ‘guilt.’ Little wonder perhaps that they insist on the Greeks paying theirs’ back when the Germans were among the prime defaulters and debt-forgiveness beneficiaries of the 20th Century. For the English speaking world, ‘credit’ comes from the Italian “Credere’ – to believe – as in the Catholic statement of faith – the “Credo.” So we have belief on the one hand when it comes to debt, but can feel guilty about it too. We also inherit a bit of the German attitude to savings “Sparen” – which appears in the English “sparingly.” The net result is a bias in our language where debt and spending is bad and savings are good. But if debt is simply a credit claim of one part of society on another, and it all sums to zero – assets must equal liabilities after all – and if my income comes from your debt – and debt, crucially, allows long term investments, this bias does astonishing harm.
Government debt is productive insofar as it funds activities that the private sector cannot fund given their respective time horizons. Many firms have tried to make money out of roads. Most have failed and ended up being bailed-out, for example. But more importantly, if debt is guilt, it can be a very productive guilt. Consider US investment in basic Research and Development (R and D).
Around 40 percent of the basic R and D that makes the pharmaceutical and biotech industries comes from National Institutes of Health funding. Similarly, take out the I-Phone in your pocket. The critical technologies that made this amazing product possible are the TCP/IP internet protocol (DARPA), the GPS network (US Navy) and the touch-screen interface (US Air Force). That Apple put it all in a shiny box and became the best company ever is true. But without those investments, made possible by long-term patient debt, there would be no I- Phone. Indeed, if you want to see how important federal R and D funded by debt is, try playing the stock market over the next decade with this observation.”

John, I know I said I wouldn’t repeat our previous debate, but, well, I’ll leave this here for others, maybe Stephen Sinclair will want to read it, and then I’ll casually walk away whistling, like I didn’t see nuthin.

“I can do no better than quote Mark Blyth. The quotation below is taken from a statement he made to the US Senate on the Budget. It is of course about the US, but the principles to which he refers – GDP, demographics etc., apply to everyone. I offer it only as a starting point, not a full explanation.”

It would be a reasonable starting point, but for the fact that it, like everything else from mainstream economics, fails to differentiate between currency issuers and currency users. Not only do they not apply to everyone, they do not even apply to the US, because the US is a currency issuer.

The various constraints Blyth mentions determine whether or not a currency-using government’s debt is sustainable. Those constraints do not even apply to currency-issuing governments, provided debt is denominated in that same currency.

Picking one piece of Blyth’s statement:

“If you are Japan or Italy, with low growth, high debt, bad demographics and an inability to get immigration right, then you do have a long run fiscal problem.”

Japan has been on the cusp of hyper-inflationary collapse for twenty years now, because its government debt is ‘too high’, or so we have been told by the mainstream. Year after year though, nothing happened. Bond yields and unemployment remained stubbornly low.

In the 2011 earthquake and tsunami, Japan took a massive hit to its economy, its exports, and not least its people. It had in any case seen a reduction in its external surplus, but the result of the disaster was a sudden shift to running a significant external deficit.

Did the long promised economic disaster follow the natural one? No. Its debt remained just as stubbornly sustainable, and not only did hyper-inflation fail to grip Japan, but its government is mostly failing in its efforts to actually increase inflation.

Italy, by way of contrast, found itself – still finds itself – in real trouble almost instantly when the GFC hit in 2008, and when the Euro woes deepened further in 2010. Despite lower government debt to GDP than Japan, and the small matter of not suffering a huge earthquake and tsunami, Italy saw its bond yields spike, and its unemployment is still growing based on figures from the end of 2014.

According to the mainstream, including Blyth, Japan should be suffering greatly and Italy should be more or less fine, but the reverse is true. The missing factor, missed by Blyth and the rest of the mainstream, is that Japan has its own currency and issues debt in that same currency. Italy does not hve its own currency.

Japan’s debt is always sustainable. Italy is always at the mercy of the ECB and other Euro bodies, the German government, and the principles stated by Blyth. Those principles simply do not apply to Japan, or any other government that has its own currency and issues debt in that same currency.

“In the UK I would merely add that we require to support the funding requirements of SMEs over the rapacious, predatory demands of the City, and clear out the tax havens.”

Yes, no argument here.

“Osborne proposes to raise £3Bn from people who have avoided tax successfully up till now. he could have done this 5 years ago (£15Bn lost). And he should go further – then we could cut the nominal rate of tax (and the average rate paid) for everyone else – the mugs on PAYE.”

At current levels of government spending, the ‘PAYE mugs’ could get a tax cut even without a recouping of tax avoided/evaded by wealthy individuals and corporations. That doesn’t mean recouping it is a bad idea though.

“He also needs to rebalance the economy for real; and stop subsidising London and the City at everyone else’s expense.”

Again, no argument here.

So what of the debt/deficit problem?

Debt is associated with past spending, and for a currency issuing government like the UK which issues debt in its own currency it is always sustainable. It’s just a promise to provide something which the UK government itself creates. The UK government can’t run out. It can’t be forced into default. There is no UK government debt problem.

Deficits are associated with current spending, and like any spending, private or government, they can be problematic. Spending which is too low will lead to a shrinking or stagnant economy with entrenched unemployment. Spending which is too high will run up against the capacity limits of the real economy and will drive accelerating inflation.

With continuing unemployment and an NHS suffering funding shortfalls, to name but two issues, and with inflation now at zero, it’s clear that UK government spending is too low. Increased government spending would, at least initially, increase the deficit.

The problem with the UK government deficit right now then, is that it is too small.

Governments should not be targeting deficits or surpluses at all though, they’re a residual, like the number of empty tins you have after you’ve painted the living room. What matters is the amount of paint on the walls: enough to cover the old colour but not so much that you get runs and drips.

Get that right and the number empty tins you end up with is not important. Maybe next time, with a different colour, you’ll end up with more empty tins, or fewer. It shouldn’t be the target.

Governments should target full employment, stable prices, and whatever particular policies we have decided as a society that we want to pursue. Get those right and whatever fiscal deficit or surplus the process produces doesn’t matter.

A fair point, and I promised not to revisit old debates. Nevertheless (oops), I am not sure Britain fits your proposition, not because I do not agree with the principle you set out; but because I do not think we really even understand adequately what is going on in the British economy. Heavily import-reliant, with a poor underlying balance of payments (often disguised by North sea Oil) and an economy that has effectively become little more than a by-product of the City; awash in foreign currency transactions (a constant £3.5Tn washing through the ForEx market alone) and myriad distortions to the property and other markets caused by the type of entrepôt ‘economy’ we have created (currency-issuer, user and offshore tax-haven all locked impenetrably together). This is why I remain cautious and selective; my problem is one of understanding the facts (and relevant causal relationships); and as you have trenchantly shown, mainstream economists do not have a great record in either demonstrating understanding or still less prophecy.

I should perhaps add that I find the guarantee offered to the banking sector by TBTF in Britain still very alarming. We know the damaging effects of CDS and other derivatives may have; but there is also the open-ended risk in the use of ‘rehypothecation’ in certain complex markets; Melvyn King appeared to acknowledge to a Select Committee that rehypothecation in particular was not a risk the system controlled, just before he demitted office at the BofE.

I do not think rehypothecation is under better control now (I stand to be corrected); and it is potentially lethal. I have never believed the current ‘new’ tripartite regulatory regime is satisfactory, and I do not think Sir John Vickers, who designed the new regulatory system was satisfied either; the City had far too much influence over the final regulatory structure, and I believe that even now there will be expensive and ingenious lawyers (far above the pay-grade of the regulators) working on exploiting the system where it is likely to be weakest; where the three legs of the system interact.

Indeed, given the power of the City and its effect on the British economy I am not sure whether or not Britain actually meets your criteria. Are you?

Thanks for that John. All this interests me because I’m one of the PAYE mugs that the government is fleecing. I am a firm believer that, at the start of the financial crisis, the government should have stepped in to force the banks to divide into separate retail and investment institutions. And whilst doing something to protect pension funds, let the other investors take the full brunt of their losses. I’ve just read that last bit back. My naivety is quite startling!
BTW, I’ve just started watching Mark Blyth on Youtube. He is a very good communicator and I shall continue to research his work further. Many thanks for the lead.

“A fair point, and I promised not to revisit old debates. Nevertheless (oops)…”

I’m willing to pretend that someone else is posting under your name, if that’s of any help.

The problems you point out are almost* all true, and they barely begin to cover the pathologies of our political and economic systems. The financial sector is at least three times bigger than a healthy system would be, and much of that system would ideally be operated**, or at least regulated, as public utilities.

A government that understands the capacities that currency sovereignty brings – and also understands the constraints that remain – is no guarantee of progress. Undoubtedly some members of the UK government already understand; as you pointed out in your original piece, the government’s actions on austerity often indicate that they do no believe their own rhetoric.

Currency sovereignty doesn’t automatically end the pathologies. A government that both understands and has the will to act, and to act in the interest of all its citizens rather than just the wealthy, is needed. That will is unlikely to come about unless the public also understand, and can call out the lies about ‘running out of money’ when the politicians tell them.

In the context of the UK the capacity provided by currency sovereignty is real, but unused for the wider good. Changing that would be progress, but there’s also the question of what system an independent Scotland should have. If there are people within UK government that do understand, then they were never going to agree to a currency union. The reasons they gave were false but the refusal was right; using the same two countries as before, the UK is like Japan, more or less, but the [r]UK in a currency union would look like Italy, or worse.

When the Scottish government first announced its currency policy, and then Westminster quickly refused a union, I thought Salmond et al had played a blinder, getting the UK government to throw them in the briar patch; “We tried to work with you but now we’ll have to introduce our own currency.”, but it never happened. So it seems the SG do not understand, which given that they asked for advice from mainstream economists, and that the SG is not already a currency issuer, is not surprising.

I’m glad to see though that people are talking about the failings of that approach, and that a solid economic proposal, including a Scottish currency, will be needed before the next referendum. Pat Kane seems to be strongly pushing for that.

So, yes, I am sure that the criteria apply to the UK, and that they are vital to creating an independent Scotland that is sustainable. I am also sure that far more is needed. An understanding of these issues is necessary but not sufficient.

* I think I’ve talked about imports before, and I tried to keep this comment short, honestly I did.

** The Positive Money crew are largely correct in their description of money creation, and I agree with their desire to remove the private sector from that process. Where I depart from their approach is their frankly ludicrous notion that the amount of money the economy will need can be determined by a central committee. No, those decisions need to remain distributed widely, both geographically in scale.

I suspect that the “pathologies” have their teeth sunk deep in the UK’s economic intestines; I am not sure a skilled surgeon could determine what is the pathology, or what is left of the patient.

You have turned to the Scottish currency issue. Of course we are still in the UK, but I will set this aside for the moment. If we may also briefly set the economics aside; while I understand there is some political support for a Scottish currency, I am very sceptical that it would carry sufficient political support in the immediate, or even the foreseeable future; the Scottish people are paradigm evolutionary gradualists in all things (this is not easily to be dismissed – I have always believed that it was this cautious, quasi-philosophical gradualism that made the referendum ‘unwinnable’ in 2014 – although this does not mean not winnable ever); evolutionary gradualism is a principle of thought with a long and deep tradition in Scotland that extends widely through our intellectual life, informing almost everything we do; and rolls right back to the Enlightenment.

Second, and returning to the economics, I am not sure what you would propose Scotland (ex-post a separate currency) would do about the (relatively large) sterling denominated debt Scotland would inherit from the UK? I have given the Scottish Government the credit of assuming it was this issue of sterling debt that drove their currency policy. I understand that, in principle, rUK has already embraced full legal responsibility for all the UK debt (so technically Scotland could not ‘default’); but I am not clear what precisely you are proposing?

I’m not sure it would be so hard to separate pathology from patient. There are economists, though clearly not in the mainstream, who have well developed proposals for what is required. What I do think is difficult, perhaps impossible in the context of the UK, is getting a government elected that would even want to do the job. It may be impossible in the context of an independent Scotland as well, but Scotland does now have the huge advantage of a politically engaged population. Will that engagement last?

As things stand, a Scottish currency may not receive much support, but ‘as things stand’ includes a population, right across the UK, that has bought the neo-liberal line that governments are just like households. Currency issuing governments* are not like households, and an understanding of the differences makes clear what a Scottish currency would mean for the prosperity and sustainability of an independent Scotland.

Some things just don’t lend themselves to a gradualist approach, as is painfully evident in the Eurozone. The approach was that monetary union was enough to begin with, with fiscal union, and tighter political union, coming later. That lack of fiscal union is at the core of the continuing Euro disaster.

I would expect Westminster to accept full responsibility for all UK debt after a second independence referendum; it would eliminate a source of uncertainty that might otherwise spook their friends in the City. If they didn’t then it would be one of many subjects up for discussion during the negotiations that would precede actual independence.

Assuming there was a remaining sterling debt owed by the new Scottish government, and also assuming the iSG didn’t want to force re-denomination, then the process of introducing a new currency holds one method of acquiring sterling. Rather than forcibly convert bank accounts to the new currency, the government could offer to purchase existing sterling held by Scottish citizens and businesses, or indeed anyone else who wanted it.

Given that tax obligations would be in the new currency, and given that initially everyone would have those obligations but would not have the currency, demand would be brisk. The only ways to acquire the new currency would be to buy it from the government or wait for government spending to filter though to you. Bank deposit guarantees should only apply to accounts in the new currency, increasing demand.

In addition, Scotland would have its share of assets as well as liabilities. Frankly, I don’t think there would be any sterling denominated debt, but this is still not a bad outline programme for introducing a new currency:

Legislate that from independence day, all taxes will be levied in the new currency, and all government spending will also be in the new currency.

Create new notes and coins and make them available at some point before independence, maybe a few weeks.

On independence day allow people to switch their bank accounts by buying the new currency, if they choose to.

At the same time, drop deposit insurance for sterling accounts and provide it only for the new currency.

If demand – and perhaps high oil prices – drive the value of the new currency too high** then create more and use it to buy sterling; that sterling debt that probably won’t even exist really isn’t a problem.

Carry on into the future, dealing with the problems inherited from the British state, and the usual vagaries that independent states have to deal with.

* Governments that don’t issue their own currency aren’t like households either, but the differences are less stark.

** It won’t drop too low, because we’re starting from a base of zero availability, and it is only being made available according to demand.

Thank you. That was interesting – the first analysis of a Scottish currency, at least that I have read, that ‘worked through’ some substantive issues.

On the British economy, as you acknowledge, as things stand we have a UK “population, right across the UK, that has bought the neo-liberal line that governments are just like households”; and although wrong, the opinions are cherished for good, comon sense, intuitive reasons that are hard to shift. Neo-liberalism has cynically anchored itself in the popular intuition, and has found – perhaps to its surprise – that it can now ‘get away’ with just about anything.

It has been established for some time (I confess I was slow to move as far as required) that, whether we agree with it or not, the neo-liberal concensus is less a theory with some difficult problems, and more an exploded ideology with little evidential support. The doubts appear to have begun in earnest when Reinhart and Rogoff’s 2010 proposition that debt over 90% of GDP damaged economic growth first came under critical scrutiny. Bivens and Irons (2010) began the assault with a devastating critical deconscrution of the Reinhart and Rogoff argument, and this has been followed by a mounting series of critical reviews of the detailed application of the methodology, and even the underlying data. Ferguson and Johnson (2011) have pointed out that the theory could not even be applied to the UK, for the extended series of data – from 1694. Indeed the UK evidence quite specifically contradicts the theory.

Neo-liberalism is falling apart, but it still retains public attention, and albeit bizarrely, public confidence. This represents less the consequences of an abstruse economic argument: but rather a major failure of courage, at least by UK and US (and most European) politicians; nobody in any large UK political party is prepared to stand up, or stand out from the crowd; a demonstration for everyone of the paltry nature, the narrow range, the lack if insight, the downright poor quality of the people who are selected, or self-select themselves to become politicians. This is the herding instinct, and we should be aware it is behaviour best suited for slow-witted herbivores, not for people we relay on to look after our vital interests. Our UK politicans are profoundly inadequate (I can scarcely overstate this); there is simply no avoiding this conclusion; they are just consumers – consumers of the conventional wisdom, consumers of baubles, consumers of celebrity, consumers of advancement; mere triflers. Nevertheless, this is also an indictment of the failure of economists, at least those who have challenged the Reagan-Thatcher orthodoxy (or the profession itself) to persuade the politicians.

I would hope that Scotland, where the public is at least or at last freeing itself from intellectual serfdom (I use the term very deliberately, with ironic purpose) that has surrounded the conventional wisdom; but even here we are yet to see whether the politicians who wish to represent Scotland are being given this (once in a lifetime?) opportunity to make a real difference, can carry it through, and offer to others elsewhere a beacon – of Enlightenment.

As for the Unionist parties; as they currently present themselves in Scotland they are generously and at their best, frankly, mere peddlers of a very cheap, shoddy version of public relations; and the rest of what they offer is dross.

Too kind. I wouldn’t call it analysis; just some thoughts from a PAYE mug. Other than that, all I can say is yes, yes, yes and yes. I’ve no real argument with any of that, except maybe to say the doubts have been there long before Reinhart and Rogoff’s 2010 nonsense, unless you meant your doubts in particular.

And that really is all I can say, all I can say before I start cooking anyway.

I hope other people are reading this; it would be a bit bad to have co-opted Mike and the Bella crew into effectively running an email server just so you and I can talk.

Thank you. Mostly QE (I think the figure stands at £325Bn) has helped the banks (already the beneficiaries of lavish public support), or the benefit has been transferred into a price rise in the Stock Market that would not have been possible without QE. Directly it has had little benefit to ordinary people, or in business terms, the vitally important SMEs which have been starved of bank/lending resources to expand.